India’s GDP Grows 7.7 Per Cent in FY26

Source: The Hindu

Context:

The MoSPI’s Provisional Estimates put India’s GDP growth at 7.7 per cent in FY 2025-26, with Q4 at 7.8 per cent. To understand what these numbers really mean and how they are computed, it helps to know what GDP and GNP are, how they differ, and the three methods used to calculate national income. These concepts are core to UPSC, RBI Grade B, SSC, Banking, and State PCS economics modules.

What is Gross Domestic Product (GDP)?

• GDP is the total monetary value of all final goods and services produced inside the geographical territory of a country in a specified period (usually a year or a quarter).
• The word “Gross” means no deduction for depreciation (wear and tear of capital).
• The word “Domestic” means produced inside the country’s borders, regardless of who produces it (Indian or foreign-owned firms).
• The word “Product” means value of goods and services produced.

Examples:

• A Maruti Suzuki car made in Manesar, Haryana, is part of India’s GDP.
• A Hyundai car made in Chennai is also part of India’s GDP, even though Hyundai is a Korean company.
• An Infosys software service delivered from Bengaluru is part of India’s GDP.

GDP can be calculated at:

• Constant Prices (Real GDP): Inflation-adjusted, using a base year’s prices. This shows real growth.
• Current Prices (Nominal GDP): Uses today’s prices, includes inflation effect.
• Factor Cost: Price received by the producer (excluding indirect taxes, adding subsidies).
• Market Prices: Price paid by the consumer (including indirect taxes, excluding subsidies).
• Relationship: GDP at Market Prices = GDP at Factor Cost + Indirect Taxes – Subsidies.

What is Gross National Product (GNP)?

• GNP is the total monetary value of all final goods and services produced by the residents of a country (Indian citizens and Indian firms), regardless of where in the world they produce it.
• The word “National” means produced by Indians, whether inside India or abroad.
• Formula: GNP = GDP + Net Factor Income from Abroad (NFIA).

Where:

• Net Factor Income from Abroad (NFIA) = Income earned by Indian residents abroad minus Income earned by foreigners inside India.

Examples:

• An Indian software engineer working in the United States sends income to India. That income adds to India’s GNP, but not to India’s GDP.
• A Korean executive of Hyundai working in Chennai earns income in India. That income adds to India’s GDP, but not to India’s GNP (it adds to South Korea’s GNP).

What is the Difference between GDP and GNP?

• GDP is location-based: It counts production within India’s borders, regardless of who produces it.
• GNP is citizenship-based: It counts production by Indian residents anywhere in the world.
• GDP = GNP – NFIA.
• GNP = GDP + NFIA.

Other Related Aggregates

• Net Domestic Product (NDP) = GDP – Depreciation.
• Net National Product (NNP) = GNP – Depreciation.
• National Income (NI) = NNP at Factor Cost = NNP at Market Prices – Indirect Taxes + Subsidies.
• Personal Income (PI): Income actually received by households.
• Disposable Income (DI): Personal Income minus direct taxes.
• Per Capita Income (PCI) = National Income / Population.

What are the Three Methods of Calculating National Income?

There are three standard methods used to compute national income. In theory, all three should give the same number, because every act of production creates value, income, and spending at the same time. In practice, statisticians use all three together for cross-checking.

1. Production Method (Value-Added Method or Output Method)

• Adds up the value added at each stage of production by all firms in the economy.
• Value Added = Value of Output – Value of Intermediate Goods used.
• Used by the MoSPI for GVA (Gross Value Added) by sector.

Example:

• A farmer sells wheat for ₹10.
• A flour mill turns it into flour and sells it for ₹15 (value added = ₹5).
• A bakery turns flour into bread and sells it for ₹25 (value added = ₹10).
• Total value added = ₹10 + ₹5 + ₹10 = ₹25, which equals the final price.

Steps:

• Identify all producing sectors: agriculture, industry, services.
• Compute gross value of output in each sector.
• Subtract value of intermediate inputs to get GVA.
• Sum GVAs across sectors and adjust for indirect taxes, subsidies, and depreciation to get GDP, NDP, etc.

2. Income Method

• Adds up all incomes earned by factors of production in the economy in a year.
• Factors of production: land, labour, capital, and enterprise.
• Incomes earned: rent (for land), wages and salaries (for labour), interest (for capital), profit (for enterprise).

Formula:

• National Income = Rent + Wages + Interest + Profit + Mixed Income (of self-employed).

Steps:

• Identify all factors of production and the income each earns.
• Sum up all factor incomes.
• This gives National Income at Factor Cost.

Notes:

• Mixed income is important in India, since many people are self-employed (farmers, small traders, artisans) and their income mixes elements of wages, profit, and interest.
• Transfer payments (pensions, scholarships, subsidies received) are not included, because they are not earned by current production.

3. Expenditure Method

• Adds up all spending on final goods and services in the economy.
• Captures what the economy spends on output.

Formula:

• GDP = C + I + G + (X – M)

Where:

• C = Private Final Consumption Expenditure (PFCE) by households.
• I = Gross Fixed Capital Formation (GFCF) plus changes in inventories (investment).
• G = Government Final Consumption Expenditure (GFCE).
• X = Exports of goods and services.
• M = Imports of goods and services.
• (X – M) = Net exports.

Example application from India’s FY 2025-26 GDP figures:

• Strong PFCE (C) growth indicates household consumption.
• Strong GFCF (I) growth indicates firms’ investment in factories, machinery, infrastructure.
• GFCE (G) is government spending on services like public administration, defence, and education.
• Net exports (X-M): India typically has a trade deficit, so this is negative, but services exports and remittances help.

Which Method Does India Use?

• India uses a combination of all three methods.
• The Production Method (Value-Added) is used heavily for sectoral GVA (agriculture, industry, services).
• The Expenditure Method is used for demand-side breakdown (PFCE, GFCF, GFCE, exports and imports).
• The Income Method is more complex due to data limitations, but is embedded in factor income estimates for various sectors.

Practice MCQs

Q1. With reference to the difference between GDP and GNP, consider the following statements:

1. GDP is based on the geographical territory of a country, regardless of who produces it.
2. GNP is based on the citizenship/residency of producers, regardless of where they produce it.
3. GNP = GDP + Net Factor Income from Abroad (NFIA).
4. GDP includes income earned by Indian citizens working abroad.

Which of the above are correct?

(a) 1, 2 and 3 only (b) 1, 3 and 4 only (c) 2 and 4 only (d) 1 and 4 only (e) All four

(Statement 4 is wrong; income earned by Indian citizens abroad is part of GNP, NOT GDP.)

Q2. With reference to the methods of calculating national income, consider the following statements:

1. The Production (Value-Added) Method sums up the value added at each stage of production.
2. The Income Method adds up rent, wages, interest, profit, and mixed income earned by factors of production.
3. The Expenditure Method adds up consumption, investment, government spending, and net exports.
4. The three methods are expected to give very different totals because they measure different aspects of the economy.

Which of the above are correct?

(a) 1, 2 and 3 only (b) 1, 3 and 4 only (c) 2 and 4 only (d) 1 and 4 only (e) All four

(Statement 4 is wrong; the three methods should give the same total, since they measure the same economic activity from three angles.)

Q3. With reference to national income concepts in India, consider the following statements:

1. GDP at Market Prices = GDP at Factor Cost + Indirect Taxes – Subsidies.
2. NDP = GDP – Depreciation.
3. National Income (NI) is generally measured as NNP at Factor Cost.
4. Per Capita Income (PCI) = National Income divided by the total area of the country.

Which of the above are correct?

(a) 1, 2 and 3 only (b) 1, 3 and 4 only (c) 2 and 4 only (d) 1 and 4 only (e) All four

(Statement 4 is wrong; Per Capita Income = National Income divided by Population, NOT area.)

Q4. With reference to the Expenditure Method, consider the following statements:

1. PFCE is the largest component of expenditure-side GDP in India.
2. GFCF measures investment in long-lived assets like factories, machinery, and infrastructure.
3. GFCE is the spending by the government on the public sector and services.
4. Net Exports always make a positive contribution to India’s GDP.

Which of the above are correct?

(a) 1, 2 and 3 only (b) 1, 3 and 4 only (c) 2 and 4 only (d) 1 and 4 only (e) All four

(Statement 4 is wrong; India typically has a trade deficit, so net exports usually make a negative contribution to GDP, especially on the merchandise side.)

Answer Key

1. (a), Statements 1, 2, 3 are correct; Statement 4 is wrong because income earned by Indian citizens abroad is part of GNP, not GDP.
2. (a), Statements 1, 2, 3 are correct; Statement 4 is wrong because the three methods should give the same total.
3. (a), Statements 1, 2, 3 are correct; Statement 4 is wrong because Per Capita Income = National Income / Population.
4. (a), Statements 1, 2, 3 are correct; Statement 4 is wrong because India typically has a trade deficit, making net exports negative.